RICHARD ZHOU
Crash Course on Cryptocurrencies
Before you go ahead and invest in cryptocurrency because you heard someone online who said that Bitcoin was going up, here’s a crash course of what to know about it. If you are considering buying cryptocurrency, it is important to know when, how and why you should buy it. Before answering these existential questions, here are some words you might want to know that are related to cryptocurrency because of their relevance, of its history, or just for fun (thanks to Wealthsimple Magazine writer Alex Beggs).
Cryptocurrency Lexicon
Hodl : A term that means you’re “holding” your crypto instead of selling it. But spelled wrong because someone wrote “I AM HODLING” on a message board in 2013 and the internet loves an inside joke.
Cold Storage : If a wallet is the digital address where you keep crypto, this is like a wallet you keep in a safe deposit box. Cold Storage is digital, but it’s not connected to the internet, so none of the very creepy people you hear about sniffing around crypto can get to it.
Satoshi : A Satoshi, named for the mysterious inventor of bitcoin, is the smallest unit of a bitcoin — one 100 millionth of a unit.
Blockchain : It’s like a big spreadsheet, shared by multiple users, that records everything super securely. Every time it gets updated with a new transaction (also called a block), everyone sees the change, and it gets added to the sheet (or chain).
DeFi : Shorthand for “decentralized finance,” it’s an emerging world of financial applications and services open to everyone, so you don’t have to trust a middleman, like a bank or a guy named Bryce.
Mining : A method to generate new coins and verify balances and transactions using fancy computers and complex math conducted by users, who are rewarded with crypto for their efforts.
Ledger : A ledger is a kind of decentralized, anonymous, public record of every crypto transaction ever and the amount and location of all the currency in circulation.
Flippening : A term for the day experts predict Ethereum will surpass Bitcoin as the largest cryptocurrency, which does not involve a large group of people disappearing into thin air, leaving their clothes behind.
Mt. Gox : The once-dominant Japan-based bitcoin exchange that went bankrupt in 2014 after being hacked. Stands for: “Magic: The Gathering Online Exchange” because it was originally an exchange for the fantasy card game.
Web 3.0 : A movement that envisions a new internet built on the principles of privacy and decentralization (imagine if three giant tech companies didn’t have all of your data — wild, right?).
The Moon : When a cryptocurrency is experiencing an uptick in the market it’s referred to as “mooning” or going “to the moon.” Confusingly, there is also a coin called MOON.
What to Know About Cryptocurrency
Now that you know some fun words that you can try implementing in your next family diner to sound classy, here’s what you should really know about cryptocurrency.
Cryptocurrency is digital money. You can transfer cryptocurrency to someone online without a go-between, like a bank. Bitcoin and Ether are the most known cryptocurrencies, but there are many other ones. People can use cryptocurrencies for quick payments and to avoid transaction fees or as an investment, hoping the value goes up. You can buy cryptocurrency with a credit card or, in some cases, get it through a process called “mining.” Cryptocurrency is stored in a digital wallet, either online, on your computer, or on other hardware.
Paying with Cryptocurrency
If you plan on buying things with cryptocurrency, it is important to know that it won’t be ensured by governments like bank deposits. This means that your cryptocurrency stored online does not have the same protection as your money in your bank account. Also, cryptocurrency payments are usually not reversible, so you only get your crypto back if the seller sends it back. In cases of refunds from cryptocurrency payments, you might get a cash refund, so it is important to know how your seller calculates these types of refunds (the value of cryptocurrency varies, a lot). Lastly, although crypto transactions are anonymous, it is possible that transactions are posted in a public ledger like Bitcoin’s blockchain. Information added on the blockchain can include the amount as well as the sender’s and recipient’s digital wallet addresses.
Trading cryptocurrency
If you plan on investing in crypto, you need to know that it is still very new; many investors refer to cryptocurrencies as speculative investments.
Figure 1 : Bitcoin Chart 2016 to Present
Figure 2 : Ethereum Chart 2016 to Present
Synonyms of speculative (in the sense of an investment, according to google definition): risky, unpredictable, uncertain, unsafe.
This being said, crypto is very volatile. If you are in a situation where you don’t have an emergency fund, it’s probably not a good idea to replace crypto for a savings fund. If you do have savings that you are ok loosing some, then a speculative investment is fine. Lastly, cryptocurrency is not a diversified portfolio. There is a reason why diversification is such a popular investment strategy and that is risk management. If you have diversified investments and end up loosing some money over your crypto, it won’t be as devastating since you may have investments in bonds or real estate that can balance out these losses.
Either way, if you plan on trading cryptocurrency make sure you do it safely and for the right reasons!
References
Beggs, A. (2020, Novembre). Crypto Quiz Part Two: The Flippening. Récupéré sur Weatlhsimple Magazine: https://www.wealthsimple.com/en-us/magazine/crypto-quiz-part-2
Beggs, A. (2020, Novembre). The Crypto Quiz! (Part 1!). Récupéré sur Wealthsimple Magazine: https://www.wealthsimple.com/en-us/magazine/crypto-quiz-part-1
coinmarketcap.com . (2020, Décembre). Bitcoin Charts.
coinmarketcap.com . (2020, Décembre). Ethereum Charts.
Federal Trade Comission Consumer Information. (2018, Octobre). What to Know About Cryptocurrency. Récupéré sur Federal Trade Comission Consumer Information: https://www.consumer.ftc.gov/articles/what-know-about-cryptocurrency
Rollenhagen, L. (2020, Août). The Five Worst Reasons to Be Trading Crypto. Récupéré sur Wealthsimple Magazine: https://www.wealthsimple.com/en-us/magazine/why-not-to-trade-crypto